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If you were strictly investing in your local country's stock market, would you be missing out on anything? Ever wonder whether one should look at foreign markets?

Well, assuming that your country's local stock market valuation isn't extremely high--if the whole market is high and expected to remain high, one has reason to look overseas (or to different asset classes)--and ignoring macro factors--you have reason to invest overseas if you have an opinion on future currency exchange rates, political risk, global economic secular themes, etc--there is really one big reason one should consider foreign markets.

The single biggest reason (except for macro and overvaluation reasons) to consider foreign markets has to do with the composition of your local market. For most countries, certain industries or sectors may constitute a big chunk of the market. If your circle of competence is not in those dominant sectors, you may have limited choices and have a hard time.

For example, the Canadian stock market is generally considered to be commodities and natural resources-oriented. Over the last few decades, financials is another big sector. Both the natural resources sectors (oil & gas, mining, etc) and financial services can be 70-75% of the market. The chart below of the S&P TSX Composite index, which is the most popular wide market index in Canada, clearly shows the dominance of those sectors.

If you didn't want to invest in commodity industries, and didn't understand or like financials, your choices in Canada are pretty limited. For instance, the tech industry and the healthcare industry in Canada are almost non-existent on the stock market.

So, if you were in a situation like that, you may want to consider overseas markets.

The interesting thing to note is that the stock market may not be representative of the economy--this is certainly the case for Canada. For instance, the natural resources sectors actually don't contribute as outsized a portion to the economy as the stock market might imply. There are more people employed, and a bigger chunk of the GDP, in non-financial services, technology, consumer discretionary and various other areas. The thing is, most of the companies in those areas are foreign companies--mostly American--so they don't show up in the Canadian stock market.

Sometimes the country's stock market may be quite diversified but the few sectors you are interested in may not be large enough. For instance, the United Kingdom market is large and fairly diversified. However, some sectors are severely under-represented. S&P UK index--I'm just sticking with the S&P data since it is freely and easily available--is as follows:

If you live in the UK and feel that you are really good at understanding technology companies, you won't have much luck finding great technology companies. There are so few technology companies listed in the UK that it is doubtful that there are many truly dominant companies that can create high shareholder wealth.

If you live in America, none of the above really apply to any large degree and you really don't have to look overseas. American market is diversified with nearly all sectors and industries represented. Furthermore, the US market is so big and deep that even under-represented sectors have large number of publicly listed companies.

To sum up, one should consider foreign markets under certain circumstances. There are downsides to investing overseas including higher commissions, higher/unfamiliar taxes, different securities procedures/laws and potential macro issues (currency fluctuations, unfamiliar political risk, etc). So it involves higher level of complexity. But if some of my thoughts above apply to you, it may be worth it for you to consider investments beyond your local market.